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Yahoo’s (NASDAQ: YHOO) value is overwhelmingly as an Asian
holding company for its stakes in the Alibaba
Group (China) and Yahoo
Japan. The next Yahoo CEO
may need to be negotiator-in-chief as the company looks to divest
itself of these valuable holdings that seem to have no synergies
with the remainder of Yahoo’s global business.

Chinese netizens are joking that Jack Ma, Alibaba
Group chairman, should takeover as CEO of Yahoo. That’s a
longshot, but whoever succeeds Bartz cannot afford to bungle the
relationship as she did.

On paper, Yahoo’s Alibaba Group stake is tremendously valuable.
In reality, Yahoo’s next CEO will likely face a tough battle to
realize full value for company shareholders: the firm faces a
foreign investor discount in China. The size of that discount
will depend in large part upon careful negotiations by Yahoo’s
top management.

The Critical Alibaba Group Stake

A most conservative of valuation of Yahoo’s 40% stake in the
Chinese e-commerce giant is $9.4 billion, or 58% of Yahoo’s
current $16.3 billion market capitalization. That’s the valuation
that the Alibaba Group’s management reportedly proposed (via a Neptune Investment
Holdings consortium) as a buyback price and which Yahoo flatly
rejected.

By other estimates, the Alibaba Group stake could easily be more
valuable than Yahoo itself, a prime reason investors–including
many Chinese–are long on YHOO even if they regard the rest of the
business as irrelevant or incompetent. Eric Jackson, founder and
managing member of Ironfire Capital, cites a ‘credible source’
who says that the Alibaba Group is buying back shares from
ex-employees at a $33.75 billion valuation, creating an implied
value of $13.5 billion for Yahoo, or 82% of its total market
capitalization.

But Mr. Jackson believes the true value of the Alibaba Group,
driven by its Taobao C2C and B2C platform, is closer to $60 billion. In China’s booming
e-commerce market, Taobao holds about 70% market share in C2C and
30% in B2C. One industry insider iChinaStock
spoke with said Taobao is set to hit triple-digit traffic growth
in 2011. Mr. Jackson and his fund are long on Yahoo.

Mr. Jackson writes, “The 2005 Alibaba Group $1 billion investment
by Yahoo! was the best by an American company in China. What Jack
Ma, Joe Tsai and the team there have built at Alibaba Group is
remarkable. The next CEO of Yahoo! should acknowledge that and
embrace that through a strong relationship. It’s absolutely
critical.”

Jack Ma’s actions in the controversial Alipay transfer in combination with recent
Chinese government policies have created a riskier environment
for Yahoo and foreign investors.

Just this morning The Wall Street Journal’s Loretta
Chao reported, “Foreign investors in the Internet sector and
other restricted Chinese industries are looking into changing
their contracts with local companies, in light of new guidelines
for Chinese officials to review mergers and acquisitions.”

Mr. Bishop says that there’s now only a small pool of potential
buyers for the Alibaba Group’s assets. The most likely is a
consortium similar to the proposed Neptune deal–Alibaba
management plus other Chinese buyers–but perhaps at an even lower
valuation now. The Alibaba Group holds a markedly advantageous
bargaining position vis-a-vis Yahoo, regardless of what the ‘true
valuation’ of the assets may be.

The Cherry on Top: the Yahoo Japan Stake

This is, of course, all aside from Yahoo’s one other key asset: a
35% stake in Yahoo Japan. Earlier this year Yahoo was rumored to
be in talks to exit from that likewise dysfunctional relationship
at for an $8 billion price.

Its imperative that Yahoo’s next CEO possess the smarts,
humility, and negotiating skills to navigate the firm’s
valuable–and delicate–relationships in Asia.